The end of the German hegemony

The German value system, which not long ago filled Europe with fear, has started eroding. The curtailment policy of Germans – in the ‘money rain’ ensured by central banks – becomes pointless, and more and more European countries are relaxing their budgetary discipline.
It is connected to a serious shift of power currently happening behind the scenes in Europe.
Germany’s influence is waning, while the used-to-be-debtors’ is rising. Germany is also losing ground in every field.
Daniel Gros, director of CEPS (Centre of European Policy Studies) who used to be an advisor of the European Committee and the European Parliament, calls attention to this dramatic change. He thinks that a potential and serious consequence will be that people will lose their trust in the European Union.

Péter Zentai: In your last publication you say that today’s Germany is far weaker than what the world thinks. However, Germany is world leader in export, and it is built on the most advanced engineering and technology, and it has 80 million inhabitants…
Daniel Gros
: The world – including the political, economic and media elite of the most influential countries – always needs points of references and examples to follow.
Germany between 2009 and 2014 served as a bottom line because among the great western economies it was almost the sole country which was not in debt, and its budget was relatively balanced.
However, the crisis has ended, and now the need for Germany’s money and loans has decreased. Parallel with this, Germany’s economic significance has been noticeably decreasing.

Only Germany can rightfully be called the real engine of the European economy…
You are right: ‘it is called’. This picture is dominating in the media and conversations. However, this is just a perception that has no real foundations.
Who can recall the cover of The Economist – which used to be legendary – that said ‘Germany: Europe’s Sick Man’? Back then, this concept spread around the world and was the dominant image. That depiction of Germany was based on absolute exaggerations, just like the current one. It is clear that historically, the German economic performance was lagging in the last two decades: compared to the world’s leading economies, it was considerably weaker, and the rate of its GDP and economic growth was lower, than its European competitions’.

Which competitions are you talking about?
France, Spain, and Italy. Even though, at the end of the crisis, the German economy was growing faster than theirs, forecasts of IMF suggest that Germany will fall behind. France, Spain, and Italy will exceed; in terms of growth rate, some smaller countries of the euro-zone will definitely surpass Germany, especially Central and Eastern European countries.

East-Central European national economies are absolutely vulnerable to German economy… How would we become faster? I presume the exact opposite if I acknowledge that Germany will slow down…
You definitely made profit from merging with Germany, even when it was ‘Europe’s Sick Man’: between 2001 and 2005, the German economy was not the most brilliant, but its relations were excellent with Hungary, Poland, the Czech Republic, and Slovakia – due to the cheap East-Central European workforce. This setup is still valid and thriving: the area is incorporated in the export-dependent German production chain; you are the stable and precise, but cheap assemblers of German industrial conglomerates.
Sooner or later, however, you should get out of this dependency, but for this, you have to transform into a knowledge and innovation based society; by developments and achievements of your own, you have to create an economic-productive and intellectual class which does not rely on working in the German economy, and which is able to pay wages according to Western standards.

Were the German successes of the last few years due to different reforms that weakened the labour market and other mostly welfare and social systems and extremely curtailed the expenditure side of the budget?
Those reforms – connected to the then chancellor Schröder – were very important, but they did not hold great significance in this matter. Achieving the export world champion title and the restoration of the budget were thanks to the fact that while Germany was struck by a crisis, there was an economic boon in the rest of the world and particularly in China. China admitted and purchased anything that Germany offered. Especially, since German products and services were considerably cheaper in comparison to those produced by other western competitions, due to the cheap Central European workers and the decrease and freezing of German wages and contributions.

However, with China currently slowing down economically, it can hardly buy everything that is ‘Made in Germany’.
The dramatic drop in the growth rate of China and numerous other emerging economies is a huge shock for the German economy. Some of the reasons behind the expected German slowdown are this and the fundamentally modernized domestic competition – for example, in the USA, China, and other Asian countries – becoming serious rivals of Germany in major export markets.
However, the main reason behind the present and future weakening of Germany’s leading position is not that, but rather the extraordinary oversupply of liquidity in the Western world.
Germany could command as long as it was basically the only one with significant reserves from which it could lend, enabling it to make claims against countries in serious debt. However, this short period is over soon.
Leading central banks made possible that everyone has access to cheap money, so nobody is drowning in debt, therefore no country has to rely on Germany.
It is evident, that the situation that Germany announced as the ‘new Germany hegemony’ was only momentary.

So the message of the last months is that the world’s exposure to Germany has ended.
This fundamentally changes the European situation. Central banks flooded the world economy with unbelievable amount of money, and in such circumstances whether a country has budget deficit or not, and if so, how much it is, loses its significance.
The German value system – strictly meeting deficit targets specified by European contracts as well –, which used to be so intimidating to the European public opinion has been eroded and turning into a caricature. Curtailment policy loses its point, and more and more European country will slowly but steadily ease their budgetary discipline.
Underneath the surface, there is a significant power shift in Europe. The star of Germany and other creditors is waning, while the debtors’ is rising. Germany is losing its power, and France, Spain, Italy, and Central Europe too in certain ways are in winning position.

What will be the political consequence of this process?
The German public opinion has to experience that the words of German leaders and the elite are not taken as seriously as before by European countries. The greater part of Europe abandons the policy of economic and financial discipline required by Germany, the more will the commitment of its people to Europe decrease.
Moreover, the popularity of the European Union can drop in Germany, while the number of EU supporters can grow in the peripheral countries because the fear of external regulations is disappearing.
The developments do not suggest a happy ending. Especially, since Germany – even though it is internally disturbed – remains a major player. It still makes up a quarter of the European Union’s performance…

Original date of Hungarian publication: October 28, 2015